Mortgage is the largest monthly expense that you might have. Yet the borrowers do little to no preparation, negotiation, or shopping to get the best deal there is. Most likely, you will end up paying much more for their loans that they need to. You should be smarter than that! Here are five of the biggest mistakes that can cost you real money.
Believing advertised rates are what you’ll pay.
Unless you have perfect or near-perfect credit, most advertised rates are out of your league. The information in your credit report is what scoring companies such as FICO use to generate your credit score. Your credit report and your credit scores determines everything from how much you pay for a loan or if you can even get a loan at all. It also generates the amount of insurance premiums you pay all the way to having a potential employer hire you. To get boasting rights on a good rate, you have to pay part of a point (one percent of the loan amount), or more to get the best rates. The rates you see may be teaser rates and they aren’t going to be available to you when you apply for a loan. That’s because banks will charge you “discount” points to give you their best rate. You’re not required to pay points, but it’s a choice if you want a lower interest rate.
Your lender will go over your credit with a fine-tooth comb to find anything to raise the rate. That includes qualifying you at the beginning of the transaction, and then running your credit again a day or two before you’re supposed to close on the home and loan. If there’s been any change in your debt-to-income ratio, goodbye low mortgage rate. What is debt-to-income ratio? It is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed. To calculate this, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.
Not comparing lenders.
Everyone knows two or three real estate agents or more, and every one of them know a loan officer or a mortgage broker. A loan officer works for a bank or savings and loan and can only offer you loan packages that the bank has put together. Some specialized loan officers, called loan underwriters, analyze and assess the creditworthiness of potential borrowers to see if they qualify for a loan. A mortgage broker prequalifies you just like a loan officer, and shops your deal around to various lenders.
So whether you talk to either the loan officer or a mortgage broker, you’re going to have to share personal financial information in order to get a realistic rate. There are many reputable brokers will show you what certain banks and credit unions quoted and you can pick the loan you like best.
If you want to do it yourself, consider talking to a local bank, a national bank, a credit union, and a savings and loan, but do remember, unless you give them personal information and permission to run your credit, it’s just talk.
Not paying attention to terms.
Many advertised rates, even for those with perfect credit aren’t what you will actually pay. There’s the APR or Annual Percentage Rate, which includes fees from the lender. It describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is finance charge expressed as an annual rate. In some areas, the APR is the simplified counterpart to the effective interest rate that the borrower will pay on a loan.
Understanding loan terms is harder than shopping for a new mattress because there are so many ways lenders can inch up the fees. A loan origination fee is also called a processing fee. It is the payment to the loan officer or mortgage broker, so this fee can vary widely. Sometimes, you may pay one lender more for an appraisal than another might charge you.
One lender may charge more for pulling your credit than another. It’s all in your good faith estimate, which you don’t get until you’ve applied for a loan. But don’t be afraid, all terms are negotiable. You can ask what particular fee is for and maybe it can be reduced or eliminated.
Waiting for a better rate.
It feels great to have bragging rights on a low rate, but you don’t want to lose the home of your dreams over a quarter of a point in interest.
You might not see the big picture here. No matter what your interest rate is, you’re still going to pay thousands of dollars in interest up front before you make any serious gain in equity. If you go all the way to the end of your loan’s term, you’ll pay so much interest that you could have bought the same home two or three times more.
Work on how quickly you can build equity instead of focusing on the percentage rate. Try to make one extra payment a year. This might help lower and offset the rate you’re paying.
Down the road, it rates drop through the floor, you can refinance, but even that’s not an ideal solution. You’ll still pay loan origination fees, title search fees, appraisal fees and so on – enough to equal the closing costs you paid the 1st time around. Don’t forget that you’ll start the amortization schedule all over again – with most of your payments going to interest instead of principal.
Choosing the wrong type of loan.
The type of loan you choose should depend on current market conditions and how long you plan to stay in your home, not how much home you want to buy.
Current market conditions favor fixed rates, because it’s rising from all-time lows. They can cost more than hybrid loans or adjustable rate loans, but the base amount is fixed and doesn’t change. Only your taxes and hazard insurance will cost you more over the years.
If ever you get an adjustable rate mortgage, you are at the mercy of market conditions. While there’s a cap on how high your interest rate can go, which is still a risk.
Planning to stay in your home for five years or more? You should get a fixed-rate mortgage. But if you plan to sell your home sooner, you’re taking a risk. It takes most borrowers five years to earn back their original closing costs in equity.
Now that you’ve narrowed your choice of lenders, you can ask them on the same day to give you a quote. Because if you wait even one day, rates may have changed, so you’re no longer comparing matching cards.
Source: realtytimes.com, consumerfinance.gov, Investopedia.com, buytolet.com, totalmortgage.com, mortgagecalculator.org
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